Decentralized Finance Currently Presents Higher Risk Than Return

Yet another buzzword is making the rounds in the cryptocurrency space - DeFi, or decentralized finance. Roughly speaking, those are investment opportunities for the holders of crypto assets, often involving elaborate schemes of growth creation.

In 2019, the crypto space is mostly made up of insiders, who already own digital assets. Cashing out to fiat is still relatively difficult - and merely holding onto assets has proven to be less lucrative than in the early days of crypto. Altcoin holders may also find their assets illiquid and seek other sources of income.

One of the biggest DeFi organizations is Maker DAO (MKR), which creates returns by issuing the DAI stablecoin. But the DAO experiment is becoming precarious. To keep DAI afloat and pegged to the dollar, the initially low interest rate of 0.5% has risen to a whooping 20.5% - an interest rate not seen in the traditional financial system.

DeFi also seems to be a phenomenon centered around Ethereum, with many entities similar to the Maker DAO. The Ethereum network itself fosters the creation of a DAO.

So much #DeFi collateral getting liquidated right now with ETH dropping, the most since Nov. 2018. –– But not enough to keep the bulls away: A record amount was added at the same time🤷‍♀️(most of it on @compoundfinancepic.twitter.com/zcy6Jf61Z1

— Camila Russo (@CamiRusso) July 15, 2019

DeFi also includes other attempts to create financial instruments based on the Ethereum blockchain. Decentralized exchanges are also considered a form of DeFi. But the recent shutdown of the 0x smart contract has led to the realization that even a DEX can have centralized pitfalls.

Another hit to DeFi was the recent NovaChain exit scam. The exchange and bot operator initially posted some returns for investors but eventually absconded with funds in Bitcoin (BTC) and ETH.

The hype for passive returns may have helped boost ETH prices, by locking up some of the coin supply as collateral. However, liquidation proved to be a danger, and ETH prices sinking led to additional panic.

ETH traded at $201.70 early on Wednesday, recovering from a dip under the $200 range. ETH failed the expectations of climbing to as high as $400, making it more efficient as a collateral. For now, DeFi is giving patchy returns at best and remains vulnerable to exploits and scams.

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